This, if we are led to believe the hype, is a world of flexibility, of opportunity, of newly-delivered control. It is a world where individuals get to use their hard-earned pension savings in exactly the way they wish to – draw it all down as cash if you want, spend it on sports cars or invest it in property, have that cruise you’ve always wanted, gift it to the children and grandchildren as a living inheritance. This new world is truly your oyster.
At least this is the vision that some would like to present; the reality is somewhat different. This, to quote Genesis (the band), is more like a land of confusion where Guidance guarantees are available but provide information and no recommendation. Where taking one’s cash from the pension could mean a rather significant tax bill, a potential cut to benefits and the distinct possibility that you run out of cash to provide for the rest of your retirement. Where there is no clear pathway to regulated, professional advice and when the consumer gets there they may not have all their retirement needs met anyway.
Apologies for being a doom and gloom merchant but there needs to be joined-up thinking around these issues, and many more, if we are to get to the land of plenty. The pension cash drawdown figures from the ABI recently suggested that £1.8 billion pounds had been taken from pension pots in the last two months. This, unquestionably, is a huge amount and other surveys suggest that if there was greater understanding about the process, and what it actually means, this amount would be even higher.
Take this research from Avacade which said 73% of 55 year-olds had not taken a cash lump sum even though 60% said they would back in April. The reason cited for this reluctance is a lack of understanding and I suspect a lack of clarity around the potential implications for them and their retirement lives should they take the cash. Indeed, just 9% said they had taken cash while others stressed their concern about their overall pension pot levels and what they might be left to live on through their retirement.
That fear of making a mistake, and not being able to make amends, is there for all to see and ultimately stems from, firstly, a lack of guidance take-up, followed by a lack of advice. As we all know those getting Guidance are only taken so far; it’s advice that should take them the rest of the way and ascertain whether taking their pension as cash is a wise move especially when considering what they are actually going to do with it.
Pre-pension reforms there seemed to be an assumption that this money would be taken and plugged into the property market. Again, some of it may have been but the Chancellor’s Emergency Budget reforms to buy-to-let mortgage tax relief are likely to have made potential silver landlords think again. Indeed, perhaps there is another way to utilise both the pension and the other available assets in order to get to the same ultimate income-generating destination. Although the problem still lies in getting people to advisers in order to have the information and recommendations to make those clear judgements.
The provision of that advice is also incredibly important – it can’t be piecemeal based solely on one product area. It has to look at the individual in the round and weigh up their entire retirement needs. This is why equity release advisers, for example, need to make and take the opportunity to converse with pension, retirement, later life advisers in order to formulate services that cover off all the individual’s needs. Drawing down the pension cash may not be required if they can utilise their property, or it can be used first and equity release later – only advisers can deliver these potential alternatives.
If we are not able to get more of the newly-retired into an advice channel then the chances of them making poor decisions grows. Guidance is one thing, advice is another and there remains no clear pathway between the two – one suspects it will be up to advisers themselves to get clients through and if they are able to co-ordinate efforts then there is a diminishing chance of poor outcomes being the ultimate conclusion of this process.
